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01 February 2017 Tial Technologies

There has been a lot of talk about peer-to-peer insurance (P2P) and the impact it will have on the industry. But what will the true effects be?

P2P is not a new concept; it was the original model of the insurance world. Mutuals were formed by collectives such as farmers to share both their losses and their gains.

It is practically a P2P model as it has the same concept of coming together to insure against risk and then diversifying that risk amongst a group, rather than having one person transferring? the risk to another.

P2P aims

The aim of peer-to-peer insurance are to save money through reduced overhead costs, increased transparency, reduced inefficiencies, and especially to reduce the inherent conflict between insurance carriers and their policyholders at the time of a claim.

In the broker model; the only requirement is that all group members must have the same type of insurance such as liability insurance; the concept carries no costs other than the special insurance. Providers are financed through the brokerages’ commission from insurers.

In the carrier model; the only requirement is that the group members have something in common such as being members of the same club. The concept carries no cost other than the fixed fee to the carrier's management, the cost of reinsurance and other more minor expenses.

Emerging methods

Today, mutual insurers effectively use the P2P model. However, there appears to be a few emerging methods that are transforming the dynamics of the risk/insured pool and creating new benefits for policyholders, carriers and investors.

An article on Medium, P2P and Structural Innovation by Kyle Nakatsuji suggests that by redefining the traditional insurance structure, P2P models can offer unique benefits such as:

  • The P2P system could mitigate elements of conflict in traditional, centralised insurance models. Because insurers (for the most part) get to keep the premiums they do not pay out in claims, occasionally the incentives of policyholders and carriers can fall out of alignment. Conversely, in a pure P2P model, because the premiums not needed for claims are refunded to the policyholders. In theory, any conflict with a carrier is diminished;
  • P2P organising models might leverage large networks like Facebook and LinkedIn more effectively than traditional insurance. The nature of self-selection logically fits the use of a social or professional network; it is easier to imagine a group of Facebook friends deciding to form an insurance group than it is to imagine that same group recommending all of their friends to purchase individual policies from a large provider. In effect, large networks power the formation of smaller networks;
  • P2P models, by enabling modifications to the size and composition of risk pools, could create differentiated pricing strategies. P2P models are often associated with self-organisation, but do not necessarily require it. So, if P2P facilitators become involved in pool selection, and can use existing or new underwriting criteria to influence or control pool composition, they could actively construct pools that offer each member the highest possible returns after claims. In other words, P2P facilitators might algorithmically generate smaller baskets of varying risk profiles – shifting members when necessary – to intentionally spread expected claims across numerous pools, thereby creating consistently lower average claims volumes per pool.

The future of P2P

There are various other structural approaches that might be used to create acquisition cost and pricing advantages or lower barriers to entry for start-ups. These are not necessarily novel structural ideas, but rather applications of existing legal strategies employed in surplus or specialty lines insurance to broader, bigger lines.

The successful implementation of the P2P model relies on a number of assumptions. However, at the end of the day, we are looking forward to finding out how companies are able to use structural innovation to create unique and differentiated value for customers.

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